The sellers had spent two agonizing months trying to make repairs to their rental house. Their tenants had not paid the rent for several months and had skipped out leaving them with a trashed house. It didn’t take me very long to see that I was negotiating with motivated sellers.
When we finished signing the purchase contract on this house, I asked the sellers if they had anything else they wanted to sell. That question resulted in another deal that was much better than the one we had just negotiated.
The seller told me about a rental house that was left them by their grandmother. Now if there is anything a disgusted, burned-out landlord needs or wants, it’s another rental house. I could smell opportunity.
The sellers had inherited a small two-bedroom bungalow that included tenants. This house was not in great condition and was not a house I would ever have bought to keep as a rental. But I recognized an opportunity to create a nice little cash flow with this house and have the mail carrier bring me another monthly check.
After asking questions, I learned the tenants had been renting for the last two years, paying $250 monthly rent, were excellent payors, and would like to buy the house themselves. But their problem was the same as a lot of folks: They had no money and couldn’t get bank financing. But they could make monthly payments, and they had been making them steadily for two years.
Everything has at least two prices
The seller’s asking price for this house was $29,000. I explained to the seller that everything has at least two prices: a cash price and a financed price. I made him two offers.
My first offer was $25,000, nothing down, sellers to carry the purchase price at zero interest with semi-annual payments of $1,250, and the first payment would be due six months after settlement. My second offer was $12,500 all cash and a quick closing.
The seller called me back and accepted the cash offer of $12,500. I immediately paid the tenants a visit and sold them the house for $25,900, $700 down and a note for $25,200 at 12% interest, payable at $302.44 monthly for 180 months.
If we invest $12,500 and receive 180 payments of $302.44, my calculator says that’s a 28.6% return. And I’m not counting the $700 down payment. We have already received 119 payments ($35,990) and have 61 payments ($18,448) remaining, for a total of $54,338. Subtracting our $12,500 investment leaves us with a profit of $41,938.
This took about four hours of my time. Does that figure out to more than $10,000 per hour? Yeah, I know, we have to consider the time value of money; and the fact that it will be fifteen years before we have all the payments in; and the buyers might stop paying; and we might have to take the home back and sell it again; and all the other horror stories–But I’ll take all the deals like this I can get.
Houses are not my first choice
I’ve created some good notes with houses, but houses are not my first choice. My favorite vehicle for creating notes is mobile homes. For years, we’ve been using this same concept of buying, selling, and financing used mobile homes, and it’s been a real cash cow. To illustrate, I’d like to share three of the deals I did last month.
I bought one mobile home for $3,500 and sold it for $6,500, with $500 down and a note payable at $200 per month for 36 months.
We repossessed another home on Friday and sold it again on Tuesday. We had already made a profit on this home before we took it back, so we had nothing in the home. (This should answer the question, “What happens if they don’t pay?”) We sold it this time for $6,000, $3,500 down, and a note payable at $150 per month for 18 months.
The third deal was just completed yesterday. This was a home we had invested $1,600 in, and it was sold for $8,500 with $500 down and a note payable at $275 per month for 36 months. This home is on a lot we own, so we also receive $225 monthly lot rent (for a total of $500 per month).
Make your money work for you
I hope these actual case histories illustrate how making your money work for you, instead of you working for your money, will make a huge difference in your life.
Tomorrow morning I can stay in bed or go fishing, but the folks who owe us mobile home payments have to get out of bed and go to work so they can send us a check. Maybe some day these folks will discover that working a job isn’t the best answer to their financial problems. But I wouldn’t count on it.
There was a time when I thought working two jobs 12 to 15 hours a day was the answer to financial security. I didn’t realize then what a price I was paying for my ignorance. There might be something better than the note business, but I haven’t found it. Learn this business and see if you agree.